November 12, 2021

IRS ADDS TWO FAQs TO ITS COVID-19 Q&A GUIDANCE FOR RETIREMENT PLANS

On October 28, 2021, the Internal Revenue Service (“IRS”) added two FAQs to its official guidance in the form of questions and answers (“Q&As”) regarding COVID-19 pandemic relief for retirement plans, including 401(k) plans.

  • The first FAQ addresses whether rehiring retired plan participants to fulfill needs related to the COVID-19 pandemic jeopardizes the tax qualification of a pension plan that does not permit in-service distributions.
  • The second FAQ asks whether a defined benefit plan may permit in-service distributions (which are commonplace under many 401(k) plans).

NOTE: Although the new FAQs are directed mainly at defined benefit retirement plans, they may be useful for 401(k) plan purposes because one of the events permitting distribution of 401(k) elective deferrals is “severance from employment.” If a 401(k) plan participant has received a plan distribution and has later been rehired for reasons related to COVID-19, this may raise factual issues (e.g., during a plan audit) as to whether the participant initially incurred a true “severance from employment.”

DISCLAIMER: This article is intended as a general overview of the new IRS guidance issued on October 28th as it affects 401(k) plans and is not meant to address the details of plan qualification, the operation of plans during the COVID-19 crisis generally, or previous or related IRS or other official guidance on this topic. As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.

Background.

  • In response to the global COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (see our article for details).
  • The IRS and other governmental agencies followed suit by issuing numerous official guidance.
  • Included in the IRS guidance for 401(k) plans is a series of Q&As interpreting various CARES Act retirement plan provisions (see our article).
  • Initial guidance has been expanded and includes the two recent FAQs released on October 28th, discussed below.

HELPFUL RESOURCE: For a list of various IRS and other governmental agency guidance and provisions applicable to 401(k) plans released since the onset of the COVID-19 pandemic (including expired guidance and provisions), see our ComplianceDashboard resource.

New Q&A #1

  • In the first of two new FAQs, the IRS considers whether a pension plan which does not explicitly permit in-service distributions (see our article entitled) risks becoming disqualified if it commences retirement payments to a participant who retires, but is later is rehired for reasons related to the COVID-19 pandemic.
  • In other words, does the fact that the participant is later rehired due to COVID-19 nullify the fact of the original retirement for purposes of commencing retirement benefits (thus rendering the retirement payments “in service distributions”)?
  • The IRS responds in the negative, reasoning that “a rehire due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual will not cause the individual’s prior retirement to no longer be considered a bona fide retirement under the plan.”

The IRS cites, as an example, a situation in which a public school district experiences a critical labor shortage due to COVID-19 and rehires a previously retired employee. The IRS states that this circumstance generally would not in itself render the original retirement null and void, although, depending on the plan terms (including any suspension of benefit provisions), the employee most likely could not continue to receive retirement benefit payments while still working.

NOTE: Although presented in terms of defined benefit plans, the result should apply equally to 401(k) plans. For instance, a 401(k) plan participant may have received a total distribution of her 401(k) account balance upon “severance from employment” but is later rehired due to COVID-19 under circumstances similar to those in the example above. If questions should arise (e.g., upon a plan audit) as to whether the employee’s original “severance from employment” was bona fide, this FAQ ought to alleviate those doubts.

New Q&A #2

  • The second new FAQ simply asks whether a qualified pension plan may permit participants to commence in-service distributions upon attainment of age 59-1/2 or normal retirement age.
  • Because the Internal Revenue Code and related Treasury Regulations made it clear that 401(k) plans may permit such distributions, this FAQ is of interest mainly to defined benefit pension plans – which generally, for policy reasons, do not permit distributions other than for reasons of retirement on or after a stated normal retirement age.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.

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